How $50 Billion in TARP Money Is Being Spent on Housing

The Obama administration is stressing that the revamp of its foreclosure prevention efforts won’t cost any more taxpayer money.

That’s because the administration hasn’t come close to using the $50 billion from the Troubled Asset Relief Program (TARP) that it set aside for its loan modification program last year.

That money helps cover the cost of lowering borrowers’ monthly payments, usually by reducing interest rates and extending loan terms to 40 years. Loan servicers that handle mortgage payments also receive incentive payments for successfully modifying mortgages under the Home Affordable Modification Program, or HAMP. Borrowers are eligible for payments after one year in the program.

Separately, the administration said last week it would begin requiring banks to consider writing down loan balances for borrowers who owe 115% of their home value. Lenders will receive 10 to 21 cents of federal subsidies for every dollar of loan principal reduced, depending on the degree to which the borrower is underwater.

HAMP has resulted in just 170,000 permanent modifications so far and is being revamped to reach more borrowers. That means the $50 billion outlay from TARP has essentially become a housing slush fund that doesn’t require congressional approval for every new outlay or program change.

Here’s a look at where some of the money is going:

$600 million in housing aid for five more states to spend through their housing-finance agencies. This was announced Monday. Ohio, North Carolina, Oregon, Rhode Island and South Carolina qualified for the aid because they have high concentrations of people living in areas with unemployment that exceeds 12%.

$1.5 billion awarded last month to the original five “hardest-hit” housing states: California, Nevada, Arizona, Florida, and Michigan, which had the steepest home price declines.

$14 billion earmarked to cover the costs of an initiative where the Federal Housing Administration will allow underwater borrowers to refinance into government-backed loans. Under that program, investors will have to write down loan balances so that the first mortgage is worth 97.75% of the home’s current value, and second-lien holders will be required by the government to write down second-lien mortgages so that homes have a combined loan-to-value ratio of 115%. The money will cover incentive payments to second lien-holders and offset the costs to the FHA from loans that default.

$4.6 billion could be spent on the Home Affordable Foreclosure Alternatives Program, the administration estimates. This includes incentive payments to mortgage servicers, second-lien holders, and borrowers in order to encourage deeds-in-lieu of foreclosure and short sales, where a home is sold for less than the amount owed. Last Friday, the administration said it would double incentive payments to investors, lenders and homeowners under that program.

Up to $10 billion under a program to provide more generous incentive payments for banks and investors that agree to modify loans in areas where potential home-price declines could make it more expensive to avoid foreclosure.